Contractual risk management critical for renewable projects' insurability

Learn tactics to successfully identify, manage, and mitigate contractual risks for renewable energy projects in our new playbook.

A guide to strengthening your contractual risk programs

As the renewable energy industry continues to evolve, the most mature organizations are implementing strategies to help them successfully identify, manage, and mitigate contractual risks for renewable energy projects. For a more high-level overview of contractual risk considerations, read this article.

The renewable energy industry is growing at a fast clip. According to the International Energy Agency, renewable energy capacity increased by 45% in 2020, led by a 90% growth in global wind capacity.

Declining costs for solar and wind projects, shifting regulatory frameworks that support decarbonization, and evolving consumer attitudes all continue to contribute to increased renewable energy use. In fact, more than 80% of all new electricity capacity added in 2020 came from renewable sources.

But as investments increase and the industry matures, securing the right coverage for your entire portfolio of projects is becoming more challenging. Increased insurer scrutiny, combined with more competition among renewable energy companies, is making contractual risk management especially critical for a renewable energy project’s success.

Contractual risk management: Long-term considerations

Most renewable energy projects span several years, if not decades, and involve multiple contracts with disparate entities. Often, contracts with lenders include specific insurance requirements that can be impacted by shifts in the market.

Because contracts are generally finalized well before insurance coverage is required or work on a project commences, insurance conditions included in contracts are sometimes no longer commercially available.
At the same time, insurers are carefully examining the experience and reputation of individual contractors and reviewing all contracts related to a specific project, paying particular attention to:

  • Insurance requirements for individual contractors.
  • Indemnification language.
  • Warranties and guarantees.
  • Extreme weather protection clauses.
  • Technologies used.

Sophisticated renewable energy developers are benefitting by proactively engaging with insurance and risk management advisors throughout the contract cycle. Constant communication helps get a better understanding of whether insurance terms included in contracts are still commercially available and reasonable. Specialized risk and insurance advisors can conduct a thorough and detailed review of contracts and may identify potential hurdles related to insurance requirements and procurement further down the road.

“Engaging risk and insurance advisors early in the project lifecycle is critical to successful risk identification and mitigation”

Early risk identification and mitigation strategies

As extreme weather events increase in frequency and severity, project owners, operators, and developers should adopt stronger risk mitigation tactics to better manage and mitigate potential hazard exposures, which can lead to financial losses, physical damage, and project derailments. Such risk mitigation tactics include:

Preliminary natural catastrophe screenings

Advanced risk engineering and modeling strategies

Analytics and budgeting tools

How to overcome insurability concerns

Keeping costs within reasonable thresholds is another major concern. Insurance costs tend to make up a substantial portion of expenses, and costs tend to escalate when finalized contracts include specific insurance requirements that have become difficult to secure.

"Engaging a risk and insurance advisor prior to finalizing contracts can help address profitability challenges by identifying any red flags that could lead to insurability challenges."

For example, asking for exceedingly high limits or requiring renewable energy companies to carry full replacement costs for catastrophe damages could create problems since coverage for these conditions is no longer commercially available.

To overcome these insurability difficulties, a broker can help develop standard terms and conditions within a registry of key terms and establish clear deductibles and limits. Ensuring all parties understand current requirements helps your broker effectively communicate with key insurers, promotes clarity in negotiations with underwriters, and supports a streamlined claims process.

Strong contractual risk management: The key to success

Demonstrating diligence in managing contractual risk sends a message to suppliers, vendors, and contractors that your organization has a sophisticated risk management strategy, which can contribute to better results for all parties. The market is already experiencing a level of consolidation, with lenders aggregating the more attractive assets. As the renewable energy market continues to expand, and more players enter the field, companies with sophisticated risk mitigation strategies are more likely to succeed.

Contractual Risk Management Playbook

Learn strategies to successfully identify, manage, and mitigate contractual risks for renewable energy projects.